Natural Gas: Playing the Haynesville Shale

The Wall Street Journalexplicated
the Haynesville shale play offering various views on the three main
ways to participate. Chesapeake (NYSE:CHK) is the diversified approach,
Petrohawk (NYSE:HK) is the concentrated way, and Goodrich (GDP) seems to be
the small cap approach. Haynesville is a southeastern shale deposit in
Arkansas, Louisiana, and Texas.

The Journal article states:

Chesapeake Energy has snapped up more than 300,000 acres of
potential mineral reserves and is bargaining for 200,000 more in the
Haynesville area. The company, which has vast resources to unearth gas
deposits, accelerated a real-estate bidding war in April, when it
declared that Haynesville “could potentially have a larger impact” than
any of its previous energy investments...

The race to acquire Haynesville acreage started fewer than two years
ago. Petrohawk was already drilling a gas deposit known as Cotton
Valley, a separate deposit that runs roughly 3,000 feet above parts of
Haynesville’s deposits, when it became aware of Haynesville in 2006.
Chesapeake later raised expectations with claims that Haynesville holds
large quantities of natural gas.

The real-estate frenzy, largely inspired by Chesapeake’s
initial claims of vast resources, has created a short-term windfall for
Goodrich, which has acquired most of its Haynesville land at an average
price of $350 per acre. New territory in Haynesville is selling for
more than $4,000 an acre, according to a senior official at Goodrich.
The rush to develop Haynesville is also being fueled by
natural-gas-futures prices that recently reached $11.17. All three
energy producers are in a hurry to begin drilling while natural-gas
prices are high.

It is an unconventional gas field that
seems typical of a number of others, such as the Barnett Shale, that
are lifting U.S. natural gas production and offering a vision of
resource plenty. I suspect that vision is accurate in the short term
but likely to disappoint beyond a few years out. Moreover, it may
tempt electric utilities to add gas fired capacity, a decision they may
come to regret if gas price continue their recent rapid climb.